Decision Analysis

One of my favorite courses is called Decision Analysis. The format is similar to other courses in that we are presented with a company that faces some sort of problem or decision, and we develop a recommendation. What makes DA unique is that there is rarely a correct answer.

Let's say you're faced with a bet, and the bet is for $50,000 dollars. You're guaranteed a 75% chance of winning. Do you take it? Seems like and easy 'yes' doesn't it? But what if losing meant that you lose your house? What if that $50,000 meant you couldn't make payroll and you had to disband your company? This is the situation we face when making all decisions. This is also the reason that financial advice is such an art. Not all answers fit all people.

DA likes to take relatively simple concepts and stack them. Remember the 75% bet? Let's take that up a level... You have to decide whether to make a 40 million dollar investment with a 65% chance of getting 15 million in return each year for the next 8 years. Trying to multiply? Don't forget to discount your cash flows, factor in opportunity costs and adjustable tax rates. Now you're in the game.

I took my Q1 midterm in DA today. Unfortunately I can't talk about it, but I can say that it took me a full five hours. Five hours isn't that much right? I mean, everybody works an eight hour day so that should be easy? True enough, but most eight hour days don't have your brain running full throttle with discussions of central limit theorems and linear regression. What I wouldn't give to have a stupid brainless meeting once in a while.

Oh, and that image above is called a decision tree, a technique used to model decisions. Fortunately we don't do them in Japanese but we might as well.